Apr 2010 - 5g/t Rule of Thumb

Is it Time to Reduce the“5g/t Rule of Thumb” ?

Underground mining has a number of “rules of thumb”, one of which that has stood the test of time, is that for most mines you need 5g/t in order to mine underground. And if it is refractory add 20% so it becomes 6g/t.

At 5g/t it meant that the mine should be able to achieve a capital return and return the invested money back, allowing for the odd occasional thing to go wrong – or in other words provide a reasonable margin for error.

There are of course the odd exceptions due to mining methods such as caving, or volume as in porphyry coppers where the ideal used to be 0.5g/t gold and 0.5%/t copper. The only mine we knew that was able to successfully mine at 3g/t was GMK’s Cassidy shaft beyond the top of Hannan’s Street in Kalgoorlie, and that was mainly due to it having been pre-developed and using a bulk sub-level open stoping mining method.

The underground mine at Bronzewing originally closed when the grades dropped to ~3g/t, after it had depleted the higher grade parts of the orebody.

However, our (ERA) past two reports both involve underground mines that we visited in March 2010 with expected head grades of 3.1g/t to 3.3g/t, one in South Africa and one in South America.

Vantage Goldfields’ (VGO’s) ~3g/t Lily mine in the Barberton greenstone belt, is located south of Nelspruit in eastern South Africa. The underground mine has declined off the floor of an open-cut, and the gold mineralisation is non-refractory, in massive pyrrhotite with recoveries >90% contained within an almost vertical shear zone in Greywacke’s.

At Lily, the east-west strike length is at least 2km long as shown in Figure 1, being open east and west on strike and open at depth. Within the shear zone, there appears to be plunging ore shoots. The width is ~8m to 10m and the current mine plan involves focusing on a 500m long area, which has ~15,000tpvm, initially at only ~400,000tpa. Ground conditions are good, solid hardrock.

Although the head grade is expected to be ~ 3.1g/t to 3.3g/t, there is some room for grades to be occasionally be higher, as the lower grade areas within or adjacent to some of the ~5g/t blocks were being left as pillars (when we visited the mine). Production was in the process of ramping up and was expected to result in cash costs of ~A$580/oz from the second half of 2010. Gold production was expected to be ~35,000ozpa from Lily.

Total costsincluding D & A and allowing for the new up to 5% mining royalty in South Africa, increase to ~A$670/oz, which is still an extremely healthy margin at current gold prices of ~US$1100/oz or A$1220/oz @ US$0.90/A$.

At the time of writing this column (18 April 2010), VGO was undertaking an IPO on the ASX with the aim of raising a maximum of $30m and an expected listing/trading date from 19-May-2010.

Mundo Minerals’ (MUN’s) ~3g/t Engenho underground mine lies within the Iron Quadrangle Of Brazil, SW of Belo Horizonte, and has been producing mostly at 3.1g/t to 3.3g/t for the past 2 years.

Cash costs are ~A$750/ozbecoming close to break even when applying a D & A of A$230/oz. The gold mineralisation appeared to be usually associated with pyrite at Engenho and lies within folded structures, like Challenger in South Australia (except without the high grade). However Enegenho has also been microfaulted probably due to its proximity to a regional major structural lineament.

The Engenho grades were expected to be higher at ~5g/t (even the open-cut averaged ~4g/t) but appear to have been reduced by internal dilution as ground conditions looked good with minimal external wall dilution. MUN’s next mine adjacent to Engenho is Crista which starts as an open-cut and then goes underground. Expected grades are higher at 4.5g/t +/- 0.5g/t and it appears to be structurally simpler (being away from the lineament and striking almost north-south).

The grades at both MUN’s Engenho and VGO’s Lily may increase at depth, but it was regarded as too early to “call” at this stage.

With the gold price apparently likely to stay above US$1000/oz (in our [ERA] opinion it should be capable of trading between US$1200/oz and US$1300/oz on a long-term basis – that being equivalent to ~US$400/oz in real money terms since 1980), the ability to mine at 3g/t underground seems to have become viable.

Certainly that appears to be the case for VGO’s Lily and even for MUN’s Engenho on a cash cost basis. That being the case, more mines appear likely to come back into production including perhaps Navigators’ (NAV’s) underground mine at Bronzewing and a number of other mines in Australia that are currently perceived as being too marginal.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd, and with his associates, may hold interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.